They said it would never happen again. Never again would there be mass unemployment. Never again would there be a stock market crash. Capitalism had overcome its contradictions and prosperity would be permanent. Marx was wrong and Keynes was right. This was the message put over by the economic gurus of capitalism in the 1950s and 60s.
This illusion began to shatter in the early 70s when falling profit levels led to closures. redundancies and rising unemployment in all the major industrial countries of the world. Soon the number out of work in these countries reached mass proportions. Ten, eleven, twelve, thirteen per cent of the workforce rather than the two or three per cent that economists claimed would be the norm under post-war capitalism.
Despite this industrial slump the boom on the stock market continued after a slight falter. But sooner or later this boom too had to come to an end, since capitalism can't change the fact that the source of wealth remains the actual production of physical goods and services and not financial juggling. No wealth is created on the stock exchange or on any other financial market. All that happens on these markets is that existing wealth changes hands. The same is true of all financial institutions — banks, insurance companies, building societies, pension funds and so on — they are all involved in mere money-changing, not wealth creation.
The basic economic role of financial markets under capitalism is to channel finance to productive industry, although these markets can also develop a life of their own divorced from the reality of production. The stock exchange is a market on which the stocks and shares of capitalist firms are traded. Normally the price of a firm's share reflects its profit-making record and prospects but, as on all markets, day-to-day prices are determined by supply and demand. If the demand for shares keeps on rising then so will share prices. This is precisely what happens in a stock market boom. Share prices keep rising, not because the profit prospects of the firms whose shares are traded are improving but simply because the monetary demand for shares goes on increasing
Under these circumstances people can make money simply by using a telephone, buying shares on credit in the morning and paying for them in the afternoon after selling them at a higher price. (This is all the Yuppies used to do.) But share prices can't go on rising for ever. Sooner or later the bubble must burst. As it did on the Stock Exchanges of the world at the end of October 1987 Reality reasserted itself and the stock market boom came to an end.
Because the Great Slump of the 1930s was preceded by the Great Stock Market Crash of 1929. many wondered whether the Crash of 87 was not going to herald some Great Slump of the 1990s. Labour MP Ken Livingstone, for instance, immediately went on record with a prophecy: "It's not just a slump that has happened on the stock market: it will be the worst recession that has happened since the Second World War and it will change all political relationships and all economic and military relationships" (Guardian, 26 October 1987).
The trouble with a prediction of this sort is that it ignores a fundamental difference between the crash in 1987 and that of 1929. The 1929 crash occurred in a period of capitalist prosperity, the source of the demand that fuelled the stock market boom being the increased profits made in productive industry. 1987's crash , on the other hand, occurred in the middle of a slump, the source of the extra demand for shares being the cash capitalist firms had available because they were not investing in productive industry. In other words, the 1987 crash does not need to herald a slump since it occurred in the middle of one.
In any event slumps are not caused by financial crashes even if, historically, they have often been preceded by one. They occur as a result of developments in what even capitalist economists have taken to calling “the real economy", that is to say, the world of the actual production of wealth. Under capitalism wealth is not produced for use but for sale at a profit. Profit is in fact the motivating force of the capitalist economy. All firms seek it and all their activities are subordinated to this end.
A slump is by definition a time when firms have cut back their investment in production, but they will have done this because investment in production on the previously-existing scale has ceased to be profitable. Profit prospects fall when a market has become glutted through overproduction (in relation to market demand not real needs, we hasten to add), as inevitably happens from time to time under capitalism since the competitive struggle for profits between rival firms leads to over-confidence and the production between them of more than the market for their goods can absorb, at least at a price that yields a profit.
If this overproduction has occurred only in some minor sector of the economy then the cut-back will be largely confined to that sector. But if it occurs in some key sector, such as steel, shipbuilding or car manufacturing. then this will have a knock-on effect on the whole economy as its suppliers, and their suppliers, and so on, are forced too to cut back on production and lay off workers. The result is a slump, be it a really major one as in the 1930s and 1880s or less severe one like that we have been in since the mid-1970s.
The stock market crash on top of the mass unemployment that returned in the 1970s, finally disposed of the myth cultivated by defenders of capitalism in the exceptionally long boom that followed the Second World War.
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